Is ARM Chatter Being Driven by Intel-Altera Merger Rumors?

The technology rumor mill has been rather active lately. One big tech and hardware rumor of April is that ARM Holdings PLC (NASDAQ: ARMH) could be bought out. What the rumor really points to is that Apple Inc. (NASDAQ: AAPL) could be looking to acquire the company. Anything is possible, but at least some caution needs to be considered here. Investors also should consider that the fuel for this rumor may stem back to whether Intel Corp. (NASDAQ: INTC) really ends up acquiring Altera Corp. (NASDAQ: ALTR).

ARM is the current arms-sale model winner due to its designs being so dominant in smartphones, tablets the Internet of Things, servers, sensors and other embedded devices. It has dozens of key partners, and it will sell to any customer. What is key here, above and beyond that Apple could easily afford the company at any reasonable premium, is that ARM is fabless. It has roughly 3,300 employees and is based in the United Kingdom. Would Apple win by taking on a design shop, knowing that it is possible that other architecture and tech-IP could pass it up in the years ahead?

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ARM’s own profile notes that its customers reported that they had shipped 12 billion ARM-based chips in 2014, an increase of 16% on 2013. Just under half of those chips were said to be shipped into mobile devices, including smartphones and tablets, where ARM has a high market share. An increasing number of chips were shipped into new markets, including enterprise networking infrastructure and embedded intelligent devices, such as microcontrollers and chips for the Internet of Things.

An article from Motley Fool’s U.K. operations gave the logic on Tuesday as to why an Apple-ARM deal might make sense. At least that may be the start of the rumor mill.

The real issue goes right back to Intel and Altera. Investors are still wondering if, or when, a deal will be announced. This merger could easily bring more challenges competitively in what is already a highly competitive chip and processor market globally. The recent collaborative efforts between Intel and Micron Technology Inc. (NASDAQ: MU) just add that much fuel to the fire.

One additional issue in an Apple-ARM deal, and in an Intel-Altera deal, is regulatory hurdles in the United States, Europe and elsewhere. The European Union, which may have different goals than the United Kingdom, seems absolutely emphatic on being as protectionist as it can get away with. Quite simply, it looks as though European regulators are doing everything they can to bide time for European technology companies to keep relevance in the ever-changing world of technology. Have you wondered about all those billions of euro fines that Europe is trying to milk out of U.S. technology giants?

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Apple is the world’s largest company by market capitalization at $731 billion. Some analysts have already hinted that Apple could become the world’s first $1 trillion company. The Dow Jones Industrial Average recently added Apple to its list of 30 giants, so obviously it is hoping that Apple can carry the day to much higher values. Oh, and those bullish analysts are modeling Apple’s growth on a standalone basis rather than with major acquisitions.

What Apple would secure here, if it were to acquire ARM, is a leadership position in the architecture and intellectual property around processors and systems on a chip and the like. Still, being so dominant in the end consumer products might draw a line in the sand with other consumer electronics companies — back to those regulatory concerns.

ARM’s American depositary shares were up almost 4% at $50.70 on about 1.9 million shares after about 90 minutes of trading in New York. The stock has a 52-week range of $37.75 to $54.64, and a consensus price target of $56.65. ARM’s current market cap of $23.7 billion is certainly not too large for Apple. It would also be a way for Apple to use some of its cash that is locked up overseas without having to worry about any 35% repatriation tax.

The question is how much a company will pay to buy $1.3 billion in total revenues from last year. Some $497 million came from licensing, and $535 million came from royalty collections. Thomson Reuters has consensus revenue estimates of $1.47 billion in 2015 and $1.69 billion in 2016. With Apple expected to have revenues of $226 billion in 2015, does spending $23 billion to $30 billion justify adding only another $2 billion in annual revenues in the coming years?

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